Question

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl’s Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl’s purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000—this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are $16,000, $40,000, and $60,000 respectively. Purchases during November amounted to $140,000.

1. What would be the cash position in the end of December, January, and February, respecively. Explan which month has suplus or needs a bank loan.

2. Suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. Discuss what would the company’s loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)

This is all the information that is provided.

Answer 1

	1		December	January	February
	a	Sales	$16,000	$40,000	$60,000
	b	Beginning of month cash balance	$400	$6,000	$6,000
	c=a+b	Total Cash available	$16,400	$46,000	$66,000
		Payments:
	d	Payment for earlier month's purchase	$140,000	$16,000	$40,000
	e	Salary	$4,800	$4,800	$4,800
	f	Rent	$2,000	$2,000	$2,000
	g	Taxes	$12,000	$0	$0
	h=d+e+f+g	Total Cash Payment	$158,800	$22,800	$46,800
	i=c-h	Excess/(deficit) of cash	($142,400)	$23,200	$19,200
	j	Target Cash Balance	$6,000	$6,000	$6,000
	k=j-i	Loan /(deposit)	$148,400	($17,200)	($13,200)
	l=i+k	End of month cash balance	$6,000	$6,000	$6,000
		Bank Loan Needed	$148,400
		Surplus of Cash deposited in Bank		$17,200	$13,200
	2	STARTS SELLING ON CREDIT BASIS ON DECEMBER 1(30 days CREDIT)
			December	January	February
		Sales	$16,000	$40,000	$60,000
	a	Cash Collection on credit sales	$0	$16,000	$40,000
	b	Beginning of month cash balance	$400	$6,000	$6,000
	c=a+b	Total Cash available	$400	$22,000	$46,000
		Payments:
	d	Payment for earlier month's purchase	$140,000	$16,000	$40,000
	e	Salary	$4,800	$4,800	$4,800
	f	Rent	$2,000	$2,000	$2,000
	g	Taxes	$12,000	$0	$0
	h=d+e+f+g	Total Cash Payment	$158,800	$22,800	$46,800
	i=c-h	Excess/(deficit) of cash	($158,400)	($800)	($800)
	j	Target Cash Balance	$6,000	$6,000	$6,000
	k=j-i	Loan /(deposit)	$164,400	$6,800	$6,800
	l=i+k	End of month cash balance	$6,000	$6,000	$6,000
		Bank Loan Needed	$164,400	$6,800	$6,800